Most investors are scared of a market crash right now.
Fear is the dominant theme. And fear of a genuine market collapse is greater than it has been in a long time.
According to Google Trends, a service that allows you to search activity for certain themes, the number of searches for “Crash 2012” has increased 20 times over in the past year.
As 2011 winds down and the Euro crisis cranks up, “crash”-related searches are accelerating.
But one indicator shows a much different picture forming…
This indicator — which has successfully predicted four out of the last four major stock market upturns — is now signaling 2012 could be a surprisingly strong year.
And not just during the ongoing Euro crisis, but because of it.
History Repeats Itself
There have been a number of market wrenching events over the last 15 years. All of them have been different, but the results were always the same: Every major crisis over the last 15 years has followed a strikingly similar (and profitable) pattern.
The Asian currency crisis in 1997 started off just like everything else. The markets were humming along… Then there’s the whiff of a large problem, which got progressively worse as investors figured out what was really going on. Investors sold in a panic as the problems appeared “systemic.” Then the central banks stepped in, papered over it…
All the extra cash floating around found a home somewhere and a new bubble or bull market is born.
The Russian debt crisis of 1998 followed a similar route. It was unexpected, posed systemic risks, and caused a lot of fear and aggressive selling. The end result was the same: The coordinated central bank actions to prevent a global economic catastrophe simply papered over the problem.
These two events and the central banks’ aggressive responses laid the foundation for the dot-com bubble that followed. And when that bubble burst, it was no different.
The downturn stemming from the dot-com bust sunk the markets. Central banks stepped in, slashed interest rates, and papered over any problems. The housing bubble and Dow 14,000 were the inevitable results.
The Euro crisis is shaping up to have similar ending.
And it means 2012 could be surprising strong. In fact, one indicator says the worst is likely behind us…
VIX Marks the Bottom
The CBOE Volatility Index, aka “the VIX” or the “Fear Index,” is one of the most useful market indicators ever devised.
Since it directly measures the market demand for “insurance” against a market crash, it directly tracks the levels of fear in a market.
The image below tracks the VIX over the last 15 years. It shows how it has marked the bottom of each major crisis and when a major turnaround for stocks began:
As you can see, each spike in fear levels came precisely at times when stocks would take off.
The late 90s spike in fear and “emergency” responses from central banks immediately preceded the dot-com bubble.
The 2002 bottom and central banks’ responses came right before a steady five-year run for stocks.
And the 2008 bottom was followed by a market bull run for stocks — once again, fueled largely by the actions of the world’s central banks.
The Euro crisis may be different than all of those crises, but the end results won’t be.
Same Story, Same Ending
To date the Euro crisis has been met with steadily increasing doses of money printing.
Eventually, these small steps will prove insufficient. In time, the “real solution” to the Euro crisis — the massive devaluation of the euro and the outright printing of a few trillion euros — will be politically expedient and enacted.
We’re not advocating for this. It doesn’t solve any problems.
It’s just how the world has been working. And things won’t change until it quits working.
Right now, it’s a safe bet what was used and has worked before (in this case, printing money) will be used again and end in the same results.
The only difference this time is the response will be greater — and the impact on the financial markets should be equally massive.
For close to a decade, Andrew’s prescient analysis and world travels have uncovered safe, ultra-lucrative investments across the world — from farmland in Russia to the gold boom in Colombia — years before the rest of the financial world has caught on. $A_weekly $3a39,000 contributing writer for Wealth Daily, Andrew has been labeled one of the world’s top investors. He has been quoted by CNBC, Fox News , and the National Center for Policy Analysis. He is an active venture capitalist and the founder and Investment Director of Freedom and Capital. For more on Andrew’s most successful picks, go to this editor’s page.
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